Mortgages Blog

A modest alternative to QE2

Mortgage rates have hovered near 4.5 percent for weeks. If mortgage rates dropped even lower, would that compel you to buy a house?

Probably not, right? If you're looking for a house now, then mortgage rates are low enough. If you're not shopping for a house right now, high mortgage rates aren't the reason. Maybe you're satisfied with your living arrangements, or you're upside-down on your house, or you're waiting for house prices to fall even further.

Yesterday the Federal Reserve implied that it's ready to try another round of quantitative easing (dubbed "QE2" by some observers), a way of dumping money into the banking system to send long-term interest rates lower. I question the effectiveness of this. Few houses and cars are being sold, and I don't think buyers are shutting their checkbooks because interest rates are too high.

Paragraph 2 is entirely about the Fed's perception of the danger of falling prices. "Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate."

Chairman Ben Bernanke is a scholar of the Great Depression, and he wants to avoid that era of falling prices. When prices fall, people wait to buy things. As people wait, producers and sellers lose jobs. With less money circulating in the economy, prices fall even more, and a vicious circle is created.

We already have deflation in housing, and home sales have plunged. If the Fed wants to spark the housing sector, forcing rates lower isn't the way to go. Instead, it might be more effective for the central bank to buy huge numbers of foreclosed houses at slightly elevated prices, igniting consumer demand. The Fed could sell the houses over the next decade and maybe even make a profit.

Not gonna happen, of course. But buying up empty houses would probably be more effective than quantitative easing.

Bankrate wants to hear from you and encourages comments. We ask that you stay on topic, respect other people's opinions, and avoid profanity, offensive statements, and illegal content. Please keep in mind that we reserve the right to (but are not obligated to) edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused.

By submitting a post, you agree to be bound by Bankrate's terms of use. Please refer to Bankrate's privacy policy for more information regarding Bankrate's privacy practices.

4 Comments

Edward

October 08, 2010 at 11:28 am

The point is that the stability that home ownership implies for social order and the jobs created by maintaining each home is reason enough to push these homes into private ownership. So whether it takes negating the tax incentives that banks may use to avoid actively selling these homes, or some other method; we should keep the conversation alive. A truly bad notion is not having any at all.

Mike S

October 05, 2010 at 3:09 pm

Why should the federal government keep the housing market over-inflated? If homes aren't selling, it's because the asking price is too high. The only thing the government is doing by keeping the bubble inflated is keeping renters from buying affordable homes.

Holden Lewis

September 29, 2010 at 10:52 am

Well, yeah, in theory. But let me put it this way. The house across the street from me is in foreclosure and has sat empty for four months. The Fed couldn't do a worse job of maintenance and upkeep than whoever is supposed to be doing that now.

A lot of people hold an article of faith that says that government can't do anything right. I disagree with that, because my streets are paved and the fire department would arrive promptly if I called. But I've had plenty of run-ins with the private sector. Ask anyone who has flown lately, or dealt with the cable company, or wanted to get an explanation of a medical bill, or waited all day, in vain, for a repairman to show up. And the bank that foreclosed on my neighbor doesn't have any concern for my neighborhood.

How we make money

Bankrate.com is an independent, advertising-supported publisher and comparison service. Bankrate is compensated
in exchange for featured placement of sponsored products and services, or your clicking on links posted on this website.
This compensation may impact how, where and in what order products appear. Bankrate.com does not include all companies or
all available products.